The decision by U.S. prosecutors to compel Steven A. Cohen to testify before a federal grand jury about allegations of insider trading at his $15 billion hedge fund is leaving many criminal defense lawyers scratching their heads.
In the past week, federal authorities have issued grand jury subpoenas seeking testimony from Cohen and others at SAC Capital, The New York Times first reported. Two people familiar with the matter confirmed to Reuters that subpoenas had been issued and Cohen was among those served.
A SAC Capital spokesman declined to comment on the situation as did the firm's longtime outside lawyer Martin Klotz. Federal authorities also declined to comment.
Several defense lawyers, including some who are former federal prosecutors, said the move to subpoena Cohen was curious as he would likely assert his Fifth Amendment constitutional right against self-incrimination.
"I don't know what purpose it serves," said Michael Bachner, a former federal prosecutor, who now represents defendants charged with securities crimes. "I think it's purely an effort to cause him to assert his Fifth Amendment privilege and knowing that will get communicated to the media."
Others said the move indicated federal authorities may not be prepared to criminally charge the SAC Capital Advisors founder with insider trading because it is unusual to seek testimony from someone under investigation.
Instead, Manhattan U.S. Attorney Preet Bharara may be more focused on trying to bring a criminal case against Cohen's 21-year-old hedge fund in an attempt to punish the billionaire investor in the pocketbook by forcing his fund to shut-down, they said.
During the course of the six-year investigation, agents have sometimes referred to SAC Capital as a "criminal enterprise" during plea negotiations with former employees of Cohen's, the lawyers said.
It was unclear how the situation would play out and entirely possible that neither Cohen nor his fund would be charged with criminal wrongdoing, lawyers said. Some defense lawyers said the prosecutors' attempt to subpoena the 56-year-old Cohen smacked of desperation given the length of time that SAC Capital has been a focus of the insider-trading investigation.
The decision by the grand jury may turn out to be the end game in a long-time probe of insider-trading allegations at the firm, which has produced some of the industry's best returns.
It is also unclear how the latest development will play with SAC Capital's outside investors, who control roughly 40 percent of the firm's assets. Investors, who have already asked to redeem $1.7 billion from the fund, have until June 3 to submit another withdrawal request.
But representatives for funds managed by HSBC, Morgan Stanley and Blackstone Group, all of which have client money with SAC Capital, declined to comment on how they will proceed. Blackstone is Cohen's largest outside investor with $500 million invested, according to people familiar with the hedge fund.
The sources said the new flurry of subpoenas went out after lawyers for SAC Capital met with prosecutors in late April and discussed ways of resolving the criminal investigation without any charges being filed in a settlement.
To date, nine current or former SAC employees have been charged with or implicated in insider-trading while working at Cohen's fund. Five have pleaded guilty. In March, the firm agreed to pay a $616 million penalty to settle a lawsuit arising from one of the investigations.
SAC Capital told investors on Friday that it would no longer cooperate "unconditionally" with the U.S. government's insider-trading investigation. The next few months would be critical in the investigation, the fund told investors but did not elaborate.
While the subpoenas pressure outside investors to withdraw money, the risks of sticking with SAC Capital are relatively low because Cohen has agreed to cover any fines and penalties. His personal wealth is estimated to be between $8 billion and $10 billion. SAC has $15 billion in assets most of which are invested in relatively liquid stocks and bonds, so the fund should have no problem unwinding its positions if forced to shut down.
The decision by prosecutors to seek Cohen's testimony has the feel of deja vu.
Roughly 30 years ago, U.S. securities regulators did much the same thing with Cohen in a civil insider-trading investigation, some six years before he launched SAC Capital with just $25 million. Cohen asserted his Fifth Amendment right against self-incrimination during that 1986 deposition with the U.S. Securities and Exchange Commission.
But last summer, the SEC questioned Cohen under oath as part of its civil investigation into insider-trading allegations. And a few years ago, in a private lawsuit, Cohen was questioned by a plaintiff's lawyer about his views on insider-trading laws.
Former federal judge Richard Holwell, now in private practice, said federal prosecutors may have decided to subpoena Cohen because he already testified last year before the SEC on some aspects of the investigation.
"If you've already testified as to a subject matter - for example a particular transaction - the courts would conclude you've willingly waived whatever privilege there was," said Holwell.
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